CoinJelly News Report:
Author: LTP Research
Binance has consistently maintained a leading position in liquidity performance within a price range of only 0.1%. Once the price range exceeds 0.3%, Binance’s Bitcoin trading pair liquidity becomes more volatile, while Kraken’s liquidity performance remains relatively high.
Introduction of LTP Liquidity Score: A liquidity calculation method based on order book depth
Report Summary
In the trading world, liquidity issues are crucial for any type of investor, trader, or exchange. This report aims to introduce and analyze the liquidity changes of various cryptocurrencies in centralized cryptocurrency exchanges based on order book depth data, and derive the overall liquidity trend of these exchanges for investors’ reference.
LTP, as a leading prime brokerage service provider in the cryptocurrency industry, uses independently developed liquidity scoring methods to comprehensively evaluate the liquidity performance of exchanges. By comparing the order book depth data of over 13 cryptocurrency pairs from 12 mainstream exchanges over a period of more than 6 months, this report draws the following main conclusions:
The top four exchanges with the best liquidity are Binance, Kraken, Coinbase, and OKX, and their rankings remain relatively stable during the observed period of over 6 months.
Since March 2024, Gate and KuCoin have shown a gradual increase in liquidity performance. On the other hand, Bitfinex’s liquidity has exhibited higher volatility.
Bitcoin liquidity performance: Binance’s liquidity performance has consistently maintained a leading position within a price range of only 0.1%. Once the price range exceeds 0.3%, Binance’s Bitcoin trading pair liquidity becomes more volatile, while Kraken’s liquidity performance remains relatively high.
Ethereum liquidity performance: Compared to Bitcoin, Ethereum’s liquidity is more volatile across all exchanges in five price range levels. However, Binance’s Ethereum liquidity score only becomes more stable when the price range exceeds 0.3%.
By observing the LTP Liquidity Index, from January to June 2024, the overall LLI liquidity index of the market has steadily increased, with five liquidity peaks. The first three occurred in March when the Bitcoin price surpassed the previous all-time high, and the last two occurred in early June.
Brief Explanation of Liquidity Concept
What does liquidity mean in finance?
In the financial market, liquidity refers to the ease with which an asset or security can be converted into cash without significantly affecting its price.
“Without significantly affecting its price” means:
The less a transaction affects the market price, the higher the liquidity of the asset.
The more a transaction affects the market price, the lower the liquidity of the asset.
For example:
Scenario 1: Alice purchases $100,000 worth of Asset A, causing the price to increase by 1%.
Scenario 2: Bob purchases $100,000 worth of Asset B, causing the price to increase by 2%.
In the above two scenarios, it can be seen that Asset A has higher liquidity compared to Asset B. This is because for the same investment amount, the price increase of Asset A is smaller, indicating that the investment has less impact on the market price, thus indicating better liquidity.
“Ease of conversion to cash” means:
The easier it is to convert an asset into cash, the better its liquidity.
The more difficult it is to convert an asset into cash, the worse its liquidity.
For example, in general:
Gold is easier to sell for national currencies than real estate, which means that gold can be converted into cash more quickly and easily.
Therefore, gold has better liquidity than real estate.
Liquidity in Crypto Exchanges
Centralized Exchange Liquidity (CEX)
Source: binance.com
In the crypto industry, almost every centralized exchange uses an order book to list all the pending orders.
Generally, the more buy and sell orders included in the order book, the better the liquidity of the trading asset.
Source: binance.com
The above image is a snapshot of the Bitcoin order book depth view. The left side represents sell orders, and the right side represents buy orders. Investors can see the total amount of Bitcoin available for buying and selling within a specific price range. As shown in the image, the 0.1% price range shows that there are 50 Bitcoins available for buying and 72 Bitcoins available for selling.
By comparing the depth of the order book, both in terms of Bitcoin quantity and in terms of USD calculation, investors can identify which exchange offers the best liquidity.
Liquidity Score Calculation Methodology
Decentralized Exchange Liquidity (DEX)
Decentralized exchanges (DEX) serve as the foundation of decentralized finance (DeFi) and rely on a trading mechanism called automated market makers (AMMs).
Due to Ethereum’s limited settlement speed, the operation of most DEXs does not rely on traditional buy and sell orders and therefore does not require an order book, unlike traditional exchanges. DEX traders directly trade with liquidity pools composed of two tokens. The price of each token in the pool is determined by a fixed mathematical formula. The most classic DEX, Uniswap, uses the constant product formula: x * y = k, which means that the product of the quantities of the two tokens in the pool remains constant regardless of user trades when there is no added liquidity.
In DEXs, there is a role called liquidity provider (LP), which is responsible for providing both tokens in the pool for trading and earning fees. As the popularity of a token increases, there are more incentives for LPs, resulting in more tokens being added to the pool and an increase in the total locked value (TVL), thereby increasing the liquidity of the pool.
Source: https://info.uniswap.org/
Tokens with higher total locked value (TVL) in liquidity pools have better liquidity in decentralized exchanges.
LTP Liquidity Score
What is LTP Liquidity Score?
To address the problem of exchanges inflating their trading volumes, LTP has developed a novel exchange ranking method that relies solely on the analysis of objective order book data, without considering subjective or other confusing factors. Order book data provides valuable insights into exchange trading activity, market depth, and participant behavior. This alternative ranking method is not intended to replace existing volume-based rankings but rather serves as a supplementary tool. By examining order book data, we can better understand the liquidity differences between different exchanges and use liquidity as an indicator to evaluate exchange performance. In the following report, we attempt to:
Explain the methodology used to calculate liquidity scores.
Compare the liquidity of 12 centralized exchanges and rank them.
Analyze the liquidity data of mainstream high-volume tokens.
Introduce and explain the LTP Liquidity Index.
How is the Exchange Liquidity Score Calculated?
Collect order book snapshot data: Obtain order book data for the same base token trading pairs from different exchanges. For example, BTCUSDT from Binance, BTC-USD from Coinbase, XBTUSD from Kraken, and tBTCUSD from Bitfinex. This data will include buy and sell prices and corresponding quantities at various price levels.
Calculate depth within price ranges: Determine the depth of the order book at specific price range levels. For example, calculate the depth within the 0.1%, 0.2%, 0.3%, 0.4%, and 0.5% price ranges. This requires summing the order quantities within specific percentage ranges of the market price.
Calculate liquidity scores for each trading pair: Compare the depth of different trading pairs within each price range. Calculate the liquidity scores for each trading pair based on relative depth. The greater the depth, the higher the liquidity score.
Aggregate liquidity scores: Combine the liquidity scores obtained for each trading pair within different price ranges (e.g., 0.1% to 0.5%) to calculate the weighted average score by assigning appropriate weights to each price range and liquidity score.
Calculate liquidity scores for multiple trading pairs: Extend the same method to calculate liquidity scores for more trading pairs and different base tokens. Collect the order book data for the required trading pairs and repeat steps 2 to 4.
Calculate liquidity scores for each exchange individually: Finally, calculate the overall liquidity score for each exchange by aggregating the scores of all different trading pairs within the exchange. The liquidity score is weighted by the 24-hour trading volume of each trading pair. Trading pairs with higher trading volumes will have a greater impact on the overall liquidity score of the exchange.
The above process is illustrated in the diagram on the next page. For a detailed explanation of the method, please visit: Exchange Liquidity Ranking Methodology.
Selection of Tokens and Trading Pairs
For spot trading, an exchange offers multiple trading options for different tokens, and generally provides multiple quote currency options for the same base token. Therefore, the liquidity of an exchange is highly dispersed.
To analyze the liquidity of exchanges more accurately, we first look at their best liquidity trading pairs.
Ideally, all trading pairs should be considered, but due to specific limitations, we select a limited number of trading pairs that account for over 70% of the total trading volume.
When comparing exchanges, we focus on trading pairs with the same base token (e.g., BTC-USDT vs. BTC-USD).
We first analyze the order book data for the selected trading pairs. The score of a trading pair is calculated by comparing different trading pairs with the same base token within the same exchange.
The overall liquidity score of an exchange is based on the weighted sum of the scores of all trading pairs, taking into account the trading volume of each pair.There was a significant fluctuation at the beginning of the month. Kraken is now ranked second in terms of liquidity, with an average score of 86.85.
The top four exchanges with the best liquidity are Binance, Kraken, Coinbase, and OKX, and their rankings remain relatively stable over time.
Among the remaining six exchanges, Gate.io is currently ranked seventh with an average score of 71.87. Gate.io’s liquidity score showed a significant increase after March 20th, reaching over 80 at one point, but then dropped back after a month. Bitfinex follows closely behind, with the highest volatility among all exchanges.
From the trend, the liquidity performance of Gate and KuCoin has gradually improved since March 2024, while Phemex, Huobi, Crypto.com, and Coinex have shown no significant changes.
The liquidity of cryptocurrencies
Bitcoin’s liquidity
By aggregating Bitcoin order book data from 12 centralized exchanges and categorizing them into buy and sell orders, we observed the depth of the order book within five price ranges, from 0.1% to 0.5%.
To zoom in on the granularity, we selected the depth change data of Bitcoin between June 11th and 12th, 2024, within a 30-hour period.
It is clear that, within the 0.1% price range, the average Bitcoin depth does not exceed $50 million. At the 0.3% level, it only reaches $100 million. The difference between the 0.4% and 0.5% ranges is not significant.
Ranking of Bitcoin market liquidity among exchanges
Binance is the most liquid exchange for Bitcoin trading orders. Especially near the order book close to the market price, Binance’s liquidity performance is very stable and consistently ranks first. From this perspective, for retail traders, Binance always provides the best prices to complete orders.
However, when considering orders that are far from the market price, Binance’s advantage is not as obvious. In price ranges of several hundred points, OKX and Kraken often occupy the first position.
When the price range extends to 0.4%, Kraken can maintain the top position most of the time. Kraken’s ability to rank first in such price ranges is closely related to its ability to provide free Bitcoin trading fees.
Ethereum’s liquidity
Similar to Bitcoin, the left-side data captures the depth change of Ethereum (ETH) within 30 hours between June 11th and 12th, 2024.
The depth distribution of ETH is more concentrated between 0.3% and 0.4%. At the 0.1% level, the depth is less than $25 million; at the 0.3% level, the depth exceeds $50 million; at the 0.4% level, the depth exceeds $75 million. However, there is no significant increase at the 0.5% level.
Based on the data during this period, the buy and sell orders of Ethereum (ETH) always maintain a 1:1 ratio.
Ranking of Ethereum market liquidity among exchanges
The liquidity of Ethereum (ETH) fluctuates more compared to BTC within the 12 exchanges. Although Binance still ranks first, its score fluctuated by more than 50% during the observed 30-hour interval.
Especially in the early morning hours of June 11th, except for the 0.5% price range, the liquidity scores of Ethereum (ETH) in all other ranges were below 75. It was not until after 6 am that Binance and other exchanges showed improvement.
OKX and Bybit have the potential to catch up with Binance in terms of Ethereum (ETH) liquidity performance. Especially in the 0.1% price range, their liquidity scores are very close to Binance.
LTP Liquidity Index (LLI)
What is the LTP Liquidity Index?
The LTP Liquidity Index is an indicator of overall market liquidity in the cryptocurrency market, derived from the weighted order book depth data of BTC and ETH from the three major centralized exchanges: Binance, Coinbase, and Kraken. It intuitively helps investors understand how market liquidity changes over time and with BTC price movements. Now let’s take a look at the basic principles of the LTP Liquidity Index.
How is the LTP Liquidity Index (LLI) calculated?
We extract the depth data of buy and sell orders from the BTC order books of Binance, Coinbase, and Kraken and divide the depth into five price ranges, from 0.1% to 0.5%. Next, we calculate the total depth for each price range.
Then, we assign weights to each price range: 30% for 0.1%, 25% for 0.2%, 20% for 0.3%, 15% for 0.4%, and 10% for 0.5%.
On a daily basis, we use these weights to calculate the weighted depth of each exchange for each price range. Then, we add up the weighted depths of the three exchanges to obtain the daily weighted depth of BTC.
We set the initial day’s depth data as the base value of 1,000. By comparing the remaining depth data with the base day’s data and using its percentage as a reference, we start from 1,000 and calculate the BTC liquidity index.
Using the same method, we calculate the liquidity index for ETH. Then, we combine the BTC liquidity index and ETH liquidity index, with BTC weighted at 75% and ETH weighted at 25%, to obtain the LTP Liquidity Index.
The current LTP Liquidity Index only introduces BTC and ETH as the underlying assets. In the future, more crypto assets will be introduced based on market capitalization, with corresponding weights.
LTP Liquidity Index (LLI)
The chart on the upper side, based on hourly changes, clearly shows the relationship between the LTP Liquidity Index (LLI) and Bitcoin prices from January 2024 to mid-June 2024.
From the chart, it can be seen that in the past six months, the liquidity index has gradually increased from the initial point of 1,000, with a standard deviation of approximately 250.
As of June 13th, 2024, the liquidity index has risen to 1,748 points. During the period of Bitcoin’s all-time high price (ATH), there were several outliers exceeding 3,000 points, indicating a significant increase in market liquidity in the short term, which is an important signal for price increase. It is worth noting that this signal also appeared in early June.
BTC Liquidity Index
When we examine the liquidity index of BTC separately, it can be seen that the two liquidity peaks in March and June mentioned above both came from BTC, with peaks close to 4,000 points.
On the contrary, BTC liquidity only experienced two severe dips in this range, which occurred in mid-April and the end of May.
Bitcoin Order Book Depth Data
This graph shows the layered depth data of BTC order books from three exchanges.
Although the actual calculation divides BTC order book depth data into five ranges (0-0.1%, 0.1%-0.2%, 0.2%-0.3%, 0.3%-0.4%, 0.4%-0.5%), for clarity, the graph only displays the first three ranges.
It is evident that the liquidity peak in March for Bitcoin primarily occurred within the 0.2%-0.3% range.
ETH Liquidity Index
As for the liquidity index of Ethereum (ETH), there was only one peak exceeding 3,000 points during the ATH period in mid-March, and no such peak occurred in June. On the contrary, the liquidity index of ETH dropped below 500 points at three time points: before the peak in March, in mid-April, and after the approval of Ethereum ETF at the end of May.
Ethereum Order Book Depth Data
This graph shows the depth data of ETH order books from Binance, Kraken, and Coinbase, the three exchanges.
Similarly, although the actual calculation divides ETH order book depth data into five ranges, the graph only displays the first three ranges, namely 0-0.1% to 0.2%-0.3%.
It is evident that the three liquidity troughs in the past six months all occurred within the 0.2%-0.3% range. Each time the liquidity sharply decreased, the overall liquidity level dropped below $10 million.
Summary
We started with the basic concept of liquidity and introduced how liquidity is understood in traditional finance to investors. Next, we explained how the order book depth of cryptocurrency exchanges affects liquidity and briefly introduced the concept of liquidity in decentralized exchanges.
Then, we introduced how LTP uses depth data from different price ranges in exchange order books to calculate the LTP liquidity scores for each exchange and cryptocurrency. With long-term data, we ranked the liquidity of 12 target centralized exchanges.
From the liquidity score data, it can be seen that the top four exchanges with the best liquidity are Binance, Kraken, Coinbase, and OKX, and their rankings remain relatively stable over the observation period of more than six months. Since March 2024, Gate and KuCoin have shown a gradual increase in liquidity performance. Bitfinex’s liquidity, on the other hand, exhibits higher volatility.
In addition, we compared the liquidity performance of BTC and ETH trading pairs across various exchanges over a six-month period and observed that Binance does not always stay in the first position.
Only within the 0.1% price range, Binance’s liquidity performance consistently maintains the leading position. Once the price range exceeds 0.3%, Binance’s liquidity for Bitcoin trading pairs becomes more volatile, while Kraken exhibits relatively high liquidity performance.
Finally, to evaluate the volatility of overall market liquidity, we introduced the LTP Liquidity Index. We observed that market liquidity has been gradually increasing over the past six months.
It should be noted that the raw data for this report comes from public exchange order book APIs, and we only used major trading pairs from 12 mainstream exchanges, so the coverage is not comprehensive. In future versions, we will include more trading pairs to make the scores and indices more effective.
